Market volatility slows M&A activity thus far in 2012

Despite challenges, miners are still seeking opportunities

TORONTO, September 20, 2012—While global economic uncertainty and a drop in commodity prices has led to a marked slowdown in merger and acquisitions (M&A) in the first half of 2012, miners with cash are viewing it as an opportunity to take advantage of lower valuations by entering M&A discussions and finding creative ways to fund projects, according to a new Mining Deals report by PwC.

Global mining M&A deal volume fell more than 30% in the first half of 2012 to 940 transactions, as compared with 1,371 transactions for the same period in 2011. Meanwhile, the total value of deals for the first six months of 2012 was $79 billion, slightly higher than $71 billion for the same period a year earlier, which includes Glencore International plc's $53.6-billion offer for Xstrata plc. Excluding that blockbuster deal, the total value of deals announced in the first half of 2012 drops to $25 billion, one-third of last year's first half-year total, and reflecting the market downturn.

"Even though market anxiety has led to a pullback in equity financing, most miners are in much better financial shape than during the 2008-2009 global financial crisis, and wiser having gone through it," says John Nyholt, Canadian Mining Deals former Leader, PwC. "With market conditions expected to remain tight for months to come, miners are looking for new ways to ensure future growth. M&A activity in the coming months will be spurred on by both opportunity and survival."

Nyholt continues, "These alternative strategies include companies with cash taking advantage of depressed prices to buy smaller rivals considered too expensive only a few months ago. Others may choose to sell an asset, or group of assets, to raise funds to advance another project."

Golden commodity
Gold dominated M&A transactions in the first half of 2012, re-establishing its first-place position against other metals such as copper and coal, whose values have fallen while the price of bullion remained steady. Gold represented the highest value of transactions at 26% in the first six months of the year and the highest volume at 29%, excluding the Glencore/Xstrata deal.

Nyholt says, "Looking ahead, more gold transactions are going to take place because of lower valuations, a rising gold price, and the growing challenge to find new resources to fuel future growth."

China's growing deal momentum
While China's growth has advanced by a modest 7.6 % in the second quarter, after decades of averaging 10 % annually, demand is still strong. "Rapid infrastructure growth in emerging nations, in particular China, will continue to drive demand for commodities such as copper, coal and iron ore," says Nyholt. "That growth, along with urbanization in other emerging nations such as India, Brazil and next Africa, will allow the 'super cycle' to continue for years to come."

Excluding the Glencore/Xstrata transaction, China is behind Canada and the United Kingdom as the next largest acquirer, having nearly doubled its share of all mining deals over the first half of 2011. Nyholt says, "China is expected to continue to become a more aggressive acquirer of resource assets as it ramps up its foreign investment targets and looks to secure metals to meet steadily increasing urbanization."

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